National CineMedia, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2022, compared with fiscal year ended December 30, 2021. The requested period was identified as “2021 Q4,” but the provided filing is the FY2022 Form 10-K, not a standalone 2021 fourth-quarter filing.
Business Context
NCM, Inc. is a holding company that manages National CineMedia, LLC, the operator of a U.S. cinema advertising network. As of December 29, 2022, NCM’s network covered 20,095 screens in 1,598 theaters across 195 designated market areas, with approximately 394.8 million attendees. Revenue is generated primarily from national, regional and local advertising, beverage-concessionaire advertising, lobby media, digital products and digital out-of-home advertising.
NCM, Inc. owned 74.6% of NCM LLC at year-end; Cinemark owned the remaining 25.4%. AMC and Regal redeemed their NCM LLC units for NCM, Inc. shares during December 2022. Cinemark subsequently redeemed all remaining units in February and March 2023.
Financial Performance and Liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $249.2 million | $114.6 million | 117.5% increase |
| Operating income (loss) | $6.9 million | $(68.6) million | Improved |
| Net loss attributable to NCM, Inc. | $(28.7) million | $(48.7) million | 41.1% improvement |
| diluted loss per share | $(0.35) | $(0.61) | Improved |
| Adjusted OIBDA | $57.3 million | $(24.7) million | Improved |
| Adjusted OIBDA margin | 23.0% | (21.6)% | Improved 44.6 percentage points |
| Operating cash flow | $(47.3) million | $(95.2) million | Lower cash use |
| Capital expenditures | $4.2 million | $6.5 million | 36.0% decrease |
| Total borrowings, gross | $1.129 billion | $1.108 billion | Increase |
National advertising revenue increased to $187.1 million from $84.2 million, driven by higher attendance, a 15.4% increase in national CPMs, increased utilization and participation in the 2022 upfront advertising market. Local and regional advertising revenue rose to $43.5 million from $19.3 million. Beverage-concessionaire revenue increased to $18.6 million from $11.1 million.
The balance sheet reported $62.7 million of cash, cash equivalents and marketable securities and $7.2 million of revolver availability at year-end, for total reported liquidity of $69.9 million. However, $59.4 million of cash was held at NCM LLC and was not available for NCM, Inc.’s dividends and other corporate obligations. Operating cash flow remained negative, and cash declined from $101.2 million at the prior year-end.
Debt consisted of $217.0 million of revolving borrowings, $307.8 million of term loans, $374.2 million of senior secured notes due 2028 and $230.0 million of senior unsecured notes due 2026. The weighted-average interest rate increased to 7.3% in 2022 from 5.6% in 2021. A 100-basis-point change in variable rates would have affected annual interest expense by approximately $5.2 million.
Material Changes Versus the Prior Comparable Period
- Theater attendance increased 57.5% to 394.8 million, but remained below pre-pandemic levels.
- Revenue more than doubled as theaters reopened, advertisers returned and the company participated in the upfront market.
- Operating income and Adjusted OIBDA returned to positive territory, although margins remained well below pre-COVID levels.
- Interest expense increased $14.9 million to $79.7 million, primarily due to higher rates and additional borrowings.
- The company recorded a $5.8 million impairment of long-lived assets, primarily related to internally developed software no longer in use.
- NCM, Inc. purchased $25.8 million principal amount of 2028 notes, reducing the outstanding balance and producing a $5.9 million net gain on debt retirement.
- Capital expenditures declined, while investments continued in digital products, NCMx, advertising-management systems and network expansion.
- The quarterly dividend was reduced to $0.11 per share for 2022 and suspended in the third and fourth quarters as part of cash-preservation measures.
Outlook, Contingencies and Unusual Items
Chapter 11 and going concern: On April 11, 2023, NCM LLC filed a prearranged Chapter 11 case. The filing accelerated outstanding debt and resulted in $1.121 billion of debt being classified as current at December 29, 2022. The auditor included an explanatory paragraph stating that substantial doubt exists regarding the company’s ability to continue as a going concern. The financial statements do not reflect potential bankruptcy-related adjustments, claim settlements, fresh-start accounting or changes in capitalization.
The restructuring support agreement contemplates cancellation of existing NCM LLC debt and equity claims, issuance of new membership units and preferred stock to creditors, an approximately $15.0 million capital contribution by NCM, Inc., and NCM LLC emerging without debt, subject to court approval and other conditions. Management cannot predict the timing or ultimate outcome of the proceedings.
Regal/Cineworld risk: Regal filed for bankruptcy and sought to reject its ESA with NCM LLC. NCM LLC filed an adversary proceeding seeking to preserve exclusivity and related contractual rights. Rejection or renegotiation of the Regal agreements could materially reduce network scale, revenue and cash flow.
2023 expectations: Before the Chapter 11 filing, management expected approximately $85.0 million of interest payments, $4.0 million of amortization payments and $7.0 million to $8.0 million of capital expenditures in fiscal 2023. During Chapter 11, management stated that NCM LLC does not expect to make interest payments on its debt and plans to fund operations from cash generated by operations. The filing text does not provide clear post-restructuring financial guidance.
Other significant risks include continued below-historical theater attendance, film-release volatility, inflation and recessionary pressure on advertisers, rising contractual theater-access costs, customer concentration, privacy and cybersecurity obligations, technology implementation risk, and potential Nasdaq delisting for failure to meet the $1.00 minimum bid-price requirement.
Investor Verification Checklist
- Track the Chapter 11 plan, creditor recoveries, court milestones, exit financing and the final ownership percentage retained by NCM, Inc.
- Verify whether NCM LLC remains consolidated or becomes deconsolidated, and assess the resulting effect on revenue, debt, cash flow and earnings.
- Monitor the outcome of Regal’s ESA rejection request and NCM LLC’s adversary proceeding.
- Reconcile available liquidity with cash held at NCM LLC, restricted cash, revolver availability and any bankruptcy-related professional fees.
- Review the maturity, treatment and potential impairment of the $1.129 billion of gross borrowings and the $35.6 million TRA liability.
- Assess whether theater attendance, advertising CPMs, utilization and upfront bookings continue recovering toward historical levels.
- Confirm the status of Nasdaq’s minimum bid-price compliance and any reverse-stock-split action.
- Evaluate the sustainability of dividends, which are subject to board discretion, debt restrictions and the availability of distributions from NCM LLC.